Collective Investment Trusts (CITs) or group trusts as they are commonly referred to, are addressed in Internal Revenue Service (IRS) Revenue Ruling 81-100 (as modified by Revenue Ruling 2004-67, Revenue Ruling 2011-1 and Revenue Ruling 2014-24). The IRS provided special dispensation for CITs in the form of exemption from income tax to ensure that these structures can be used to pool assets of various qualified retirement plans, individual retirement accounts and other similar plans without creating unnecessary income tax obligations. The goal is to ensure that pension-related money and the returns earned through investing that money, are not eroded through income taxes.
CITs have become increasingly popular to improve efficiencies both operationally and from a cost perspective, when US retirement plans explore different investment opportunities. The tax exemption which Revenue Ruling 81-100 provides means that retirement plan investments can retain their tax-exempt status when investing through a CIT. However, this is not always the case when CITs invest offshore and suffer withholding taxes on foreign investment income.
The challenge is that many foreign tax authorities do not recognize the group trust structure as a “pension fund” and it has become increasingly difficult to secure pension plan related withholding tax exemptions for CITs. Without a viable option for foreign withholding tax recovery, investment through CITs can potentially place pension plans in a detrimental tax situation when compared to direct investment by the plan itself.
In order to secure exemption from withholding tax, investment jurisdictions around the world require varying degrees of detail regarding underlying retirement plan investors in each CIT before granting withholding tax relief. Requirements vary from disclosure of underlying retirement plans to the need to obtain tax residency certification for each retirement plan invested in the CIT (Form 6166) from the IRS. In some jurisdictions, the requirements are even more onerous where there have been requests for disclosure of participants within the retirement plans invested in the CIT.
The complexity and administrative burden involved in meeting these requirements has left many CITs in a situation where they are effectively not “tax exempt” in foreign jurisdictions and the road to unlocking and simplifying recoveries for these group trusts is a long one. The IRS has considered revised verbiage on future 6166s for CITs, however it remains to be seen whether this ultimately results in reduced withholding tax leakage for CITs and their underlying retirement plan investors.
WTax actively files claims on behalf of many CITs at various levels of investor disclosure. WTax takes care of the administrative burden involved in pursuing claims where underlying investor disclosure and documents are required. We are also working closely with the foreign tax authorities to collaborate and simplify the process in future to ensure that retirement monies aren’t exposed to taxes unnecessarily. We remain committed to maximizing withholding tax recovery opportunities for our clients and strive to ensure that refunds for all investment vehicles are maximised.
Contact WTax for more information regarding claiming withholding tax for CITs.